There is a strong support for side agreements in the UAE in order to encourage foreign investment. Most law experts in the UAE support decisions made by various courts to articulate side agreements. However, side agreements promote economic success rather than statutory provisions between various individuals (Campbell, 2013). In the UAE, these agreements are required to promote foreign investment in adherence with the government declarations. The UAE federal law helps in the determination of the validity of foreign shareholders owning companies in the UAE. The paper will consider strong support and arguments for side agreements for shareholders in the UAE.
Recently, the Federal Supreme Court in the UAE has made a unique argument on the application of side agreements among shareholders. Judgments also highlighted the validity of side agreements concerning the UAE limited liability company. Side arguments support provisions that major shareholders have the rights and power to remove shareholders owing to sufficient grounds and reasons (Noack, 2014). Thus, any UAE shareholder owning more than 50 per cent of shares in a company can request for the removal of shareholders based on circumstances stated in Article 677 of the Civil Code. The application of side agreements allows for continued engagement of the UAE shareholders in various businesses. Even though the company may be dissolved due to the lack of an appropriate legal corporate structure, side agreements ensure that interests of every shareholder are protected. Regulations of side agreements are contained in Article 20. Article 20 states that each of the parties must appreciate its share in the company, as well as providing for equal distribution of losses and profits to shareholders (Campbell, 2013). As a result, the UAE shareholders understand significance of side agreements in the company ownerships.
The law relating to side agreements has also been developed to promote legality of foreign individuals and firms engaging in business in the UAE. The UAE federal law provides for better provisions and regulations that enhance rights of shareholders in the UAE. They also allow transparent structures for formation of joint ventures with other shareholders. In spite of some challenges on the validity of side agreements, common laws are supported by binding precedents in the UAE. This ensures that foreign individuals are well protected. In the UAE, shareholders should contain all relevant documentations, including passports and other constitutional documents. Authentication of documents usually takes four to six weeks (Noack, 2014). The process of determining authentication of documents is crucial in the signing of side agreements.
Most importantly, courts in the UAE usually grant for the award of money damages based on the quantum merit principle. In addition, side agreements outline arbitral methods available to foreign shareholders. It ensures that all arbitration processes are conducted in English. It also emphasizes the need to respect the Arabic language as the official language in the UAE. It recommends for additional provisions appointing translators in the formation of agreements (Terterov, 2006). In the UAE, foreign and local partnerships closely review formation of joint venture and implications on the UAE federal law. Side agreements protect rights and privileges of the UAE shareholders.
Supporters of side agreements in the UAE argue that it is necessary to understand that foreign shareholders own most of limited liability companies (LLCs). Side agreements in the UAE have taken different forms that differ from regulations of the company’s memorandum of association and the UAE federal law. For instance, a foreign shareholder could advance a loan to shareholders in the UAE. The loan would be later used to buy shares of a company, gaining ownership in the company (Campbell, 2013). Similarly, shareholders in the UAE may apply other arrangements that grant foreign shareholders the ability to control the company within the period of loan repayment. In spite of the memorandum of association limiting ownership of companies in the UAE, side agreements help in protecting interests of foreign shareholders.
On the one hand, based on the companies’ laws, most side agreements are illegal and unenforceable. However, most of the UAE courts have recognized existence of side agreements. There is the lack of relevant explanations on the legality of agreements between shareholders in the UAE. On the other hand, there are contrary views on the applicability of side agreements in the UAE. Most counter arguments provide that agreements ignore the rule of law in the economy since the companies’ law seeks to limit foreign investment to up to 49 per cent (Terterov, 2006). However, side agreements help foreign parties to surpass legal provisions. The agreements enable foreign parties to become majority shareholders, limiting the role of local shareholders. Counter arguments suggest that such arrangements lack authenticity.
In summary, I support formation of side agreements between local and foreign shareholders in the UAE. Such arrangements help to promote foreign investment in the economy. They also protect rights and privileges of foreign shareholders in the UAE. In spite of various counterarguments regarding their legality, side agreements are crucial in enabling foreign shareholders to gain control and management of the UAE companies. For instance, if foreign shareholders own the majority of shares of a company, they have a right of removing shareholders from the company under valid grounds. This illustrates one of the rights of the UAE shareholders after engaging in side agreements. Therefore, side agreements are helpful for shareholders in the UAE.
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